Tech Strategy

Wii Encore

1) What are the main challenges faced by video game console manufacturers
when launching a new console generation and how do they overcome them?
Main challenges faced by game console manufacturers can be classified into three
categories: hardware/production-related, games-related, competition-related.
Next generation console has to bring innovation in the gaming experience at the
appropriate time. It sometimes could be challenging to anticipate what customers would
view as cool (multi-features of PS3 and Xbox 360 vs move-sensing of Wii) and a
valuable addition to the experience (quick-recall cartridge vs bigger-memory CD). It is
extremely important to have cutting-edge product well-tested and have it without any
hardware bugs and issues.
Console wont be valuable without games people can play on it. Games policy
decisions, such as in-house vs third party development, SDK availability, type and
quality and diversity of content have direct influence on popularity of the console. For
new cutting edge entrants, like Wii was, it is important to provide game suite along with
console. The obvious reason is to give customers something to play on brand-new
console, another reason is to showcase capabilities of new system, and attract thirdparty developers. For established systems, or follower systems without major
innovation features in the hardware area, it is important to create a console specific cult
games, as well as facilitate development of diverse game offerings for the console.
Another big challenge is managing and staying ahead of competition. If the console
manufacturer announces launch of a new console, their competitor may announce their
console a year ahead with better hardware and thus gain an edge. Coming up with new
innovative approaches to gaming pays off but require vision, research and willingness
to take risks. Wii, at the time, obtained considerable first mover advantage, outsold its
more feature-intensive competitors, and kept the company ahead of competition for
several years. Bigger companies fight such challenge by using their extensive
resources to improve on the invention in the hardware.

2) How do console manufacturers make money? What is the logic behind their
pricing strategy?
Initially, console manufacturers such as Magnavox (with its Odyssey console) did not
bundle games separately, and thus derived all their profits from console sales.

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However, starting with Fairchild Cameras Channel F and Ataris VCS 2600, console
manufacturers separated the console and games into two complementary revenue
streams. However, console manufacturers were giving away hardware at near-zero
profit margins but made money on software. For example, the Atari VCS 2600 retailed
at $199 ($731 in 2011 dollars), which was a small margin over manufacturing costs, but
each cartridge sold for $30 and cost $10 to manufacture.
After the market crash of 1983, caused due a proliferation of cheap and uninspired
game software, console manufacturers started charging royalty feeds to closely monitor
quality of games sold. Nintendo equippsed

3) Why was Microsoft unsuccessful in its attempt to replicate its business

arrangements from the PC industry into the videogame industry (in particular:
licensing third-party hardware manufacturers and charging no royalties to thirdparty developers)?
Initially, Microsoft wanted the Xbox to resemble the arrangements of the PC
industry, which is how it gained its initial success. Microsoft became tremendously
popular by creating a software platform that could not be ignored: the Windows OS. As
a result, Microsoft offered developers the information and tools required to create
applications that were compatible with Windows, and negated any royalties. However,
developers, and hardware suppliers, were not eager to engage in PC-like attributes for
the Xbox.
Microsoft did not realize that the Xbox was a completely new system, something
entirely unlike the PC. Those who play PC games heavily differentiate between the two
systems. A PC is not a console, and the two systems should not be tied together or
unified in the slightest. Among gamers, there is a sort of elitism that occurs; those who
play games on PCs believe that the games they play are of a higher calibre than those
who play console games. Gamers can customize their PC to make it conducive to
playing high quality games, however, console manufacturers do not provide gamers
with the ability to customize their products. As a result, despite the $7 royalties that
Sony, Sega, and Nintendo were charging for their respective consoles, developers
preferred to work with these companies. These companies understood the difference
between a console and a PC that developers appreciate, and this concept was lost on
Microsoft. Due to the lack of developer contribution and participation, companies like
Dell, Mitsubishi, and Panasonic realized that the Microsoft Xbox was bound to fail.

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4) What could Nintendo do to come up with something completely novel once

again (a Wii Encore) in order to escape head-to-head competition against its two
larger rivals? How could Nintendo fend off the new substitutes, which were
competing for a large portion of its customers?
Nintendo finds itself in a tough place where its direct competitors are stealing market
share with superior devices and support and a platform i.e. mobile is stealing the
markets. Nintendo wisely changed the value proposition of its products by moving it
away from hardware driven superiority to emphasizing the fun factor of it which
enabled it to bring many more casual gamers into the fray ranging from young children
to nursing home residents and even Her Majesty, Queen Elizabeth II.
Nintendo has a few paths in front of it that it could potentially go down. The first path
would be partner with mobile device manufacturers to produce a mobile phone that is
enhanced for gaming by using superior screens and graphics cards. Most phones today
come with gyroscopes and accelerometers that are central to the wii encore experience.
This could be further enhanced by developing apps for popular mobile platforms that
could wirelessly connect with the Wii hardware console thereby letting players compete
on the console itself. In a way it would be a player bringing his own mobile device as a
controller and with that you could have multiple people play.
The second option it has is to develop mobile versions of its blockbuster games it has
that it could give for free to develop awareness and excitement amongst the user base
that is not ready to pay money for a wii or buy games on the console but wants to try
them out.
In terms of incremental changes it can make, providing developers tools to develop
games on its platforms and then sharing the revenue from the games. This will improve
chances of developing blockbuster games that can help popularize the platform.

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Appendix:
Table of invention features and challenges for consoles
Year

Company/
Console

Innovation

Challenge

1972

Magnavox/
Odyssey

First console, with hardwired into

console set of games;

Limited action
(boring?)

1974

Atari/
Pong

Hit game; hardwired in console; easy

instructions

Pong clones

1976

Fairchild/
Channel F

Multiple games stored on cartridges

1977

Atari/
VCS 2600

System with cartridges +Joystick;

unique for its time pricing model: made
money from cartridges (software) rather
than from hardware

No lock-out for
independent
game
developers

1979

Activision and
others

Game developers independent from

console manufacturer

Many flopped
because of bad
game quality

1983/85

Nintendo/
NES

Improved image quality; focused on

developing 1-2 hit in-house games;
Seal of Quality chip to regulate thirdparty developers; tight limit on amount of
games per developer

1995

Sony/
PlayStation

CD-drive; focus on more mature

audience; licensed any compatible
software; SDK for third-party developers

1998

Sega/
Dreamcast

First 128-bit system

1999

Sony/
Playstation2

DVD capability; Internet connectivity;

backward-compatible

2001

Microsoft/
Xbox

Limited titles;
hardware
issues

Difficulty with
hardware and
software
providers

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2005/2006

Microsoft/Xbox
360 and Sony/
PlayStation3

Packed with features beyond gaming

No real
innovation in
gaming area

2006

Nintendo/
Wii

Motion-sensing controllers;

Demand higher
than production
capability

2010

Microsoft/Kine
ct and Sony/
Move

Motion sensing controllers with more

sophisticated sensing capabilities